Thursday, December 6, 2012

What IBM's Results Mean to the Tech Sector

When looking at IBM’s (NYSE: IBM) results there are always two concerns. The first is IBM itself and the second is the commentary around all its various sectors and what this means for its competitors. Therefore I’m going to split this article into first discussing IBM's main business segments and then the individual components.

IBM Disappoints

The market didn’t like the results or the associated commentary. Management pointed out that September saw a sharp fall off in demand from North America and what IBM calls its ‘Growth Markets’ (the BRICs and other emerging markets). Of course these regions are supposed to be the stronger areas of the global economy!

On closer inspection the weakness in the BRICs was mainly attributed to Brazil with the other countries growing strongly. Meanwhile Australia and Mexico were also cited as areas of poor performance. As for North America, if it is broad based macro weakness than we will be hearing about it soon enough from other tech companies. It is tempting to get into an in-depth play by play analysis and formulate reasons and excuses that lead to concluding that the quarterback and overall offensive unit playing tag football in the park are actually Dan Marino’s 1984 Dolphins in disguise.  The difference is that Marino’s stats backed up the claim while IBM’s trends do not.

To be fair to IBM, currency effects have affected results. For example, Software and Global Technology Services had positive sales growth on a constant currency basis with numbers of 3% and 1% respectively. Software has more than double the gross margins of the other three major segments. Moreover Software apparently had a ‘handful of deals’ that slipped into the next quarter so the underlying performance is probably better than has been reported.

On a more negative note, Global Business Services has been negative on any basis you like for the last few quarters but the real disappointment was saved for Systems & Technology.  Even adjusting for the divestiture of Retail Store Solutions and currency effects, hardware revenues were still down 9%.

To look at these issues closer I have broken down revenues on a sequential basis.

This helps filter out some of the currency effects. Frankly it’s hard to conclude that technology markets aren’t slowing but are there pockets of resistance or even strengthening growth?

What IBM’s Results Indicate for the Competition

Essentially it is a story of hardware weakness with some strength in areas like business analytics, cloud computing, storage software and database management.

In fact total branded middleware solutions were up 3% on a constant currency basis and this should interest Tibco Software (NASDAQ: TIBX) shareholders after it confounded the naysayers with a set of results and outlook that wasn’t as bad as most had feared. However with the recent weakness in IT and IBM's commentary I’m looking at Tibco’s guidance for Q4 license revenues and wondering if it is now going to hit it.

I would also be concerned about prospects at Master Data Management (MDM) Informatica (NASDAQ: INFA) because this company has been largely blaming Europe for its troubles but IBM said that the drop off was generally in North America. Informatica is a small company (giving results soon) which competes against some behemoths like IBM, Oracle (NASDAQ: ORCL) and SAP and if the tech market is slowing overall, it is not unreasonable to expect these companies to compete that much harder.

Speaking of Oracle it also competes with IBM in data-basing, storage analytics and middleware. The news on the storage was mixed with hardware down 8% but software (reported within Tivoli) was up 14%. It all suggests that Oracle might be better placed to deal with the current markets than most IT companies. Another company who might also have cause for optimism is CA Technologies (NASDAQ: CA) which competes with Tivoli within enterprise management software. Earnings estimates haven’t come down much for CA this year and the stock has performed well. If  Tivoli’s results are anything to go by then perhaps it too can outperform?

Where Next for IT?

The key takeaway from these results is that the results seem to be part of a trend within IBM’s operations (see first graph) therefore it is too early to conclude that there is broad based weakness in North American corporate spending on IT. Moreover, the relative outperformance of software versus hardware suggests that there are opportunities out there for certain companies, but stock pickers are going to have to be very selective and watch the earnings season very closely.